Why Southeast Asia is One of the Best Places to be an Entrepreneur

To investors, Southeast Asia is fertile ground for business startups these days.
Wednesday 6 June 2018
Photo: Pixabay

The ASEAN market is one of the world’s most diverse and entrepreneurial – a market that is ready for innovation, creativity, and even disruption. And no, it’s not the sort of entrepreneurism that is dependent on powerful government connections or contracts either.

It may have something to do with the young-ish population in the region.

A regional study by the Global Entrepreneurship Monitor (GEM) back in 2014 found that two-thirds of its 642 million population, which makes up about 9% of the global population, sees entrepreneurship as a positive career choice, higher than GEM’s global average of 62.46%.

A key factor is that while nearly a tenth of the world population lives in Southeast Asia, their economic activity only makes up 3.2% of the world’s GDP.

The developing economies in the region are still grappling with legacy issues such as old infrastructure, which presents opportunities for the entrepreneurial.

It is a potent mix that makes the region among the fastest-growing startup spaces globally. Much of that momentum is due to government policies and initiatives that aim to encourage entrepreneurship, though this varies from country to country.

“In Asia, Singapore and South Korea, as well as Malaysia, have been leading the way. Now several other countries are already starting their initiatives,” says Jeffrey Paine, co-founder of earlystage venture capital (VC) firm Golden Gate Ventures.

It’s working. Funding for Southeast Asian startups hit a record US$7.86 billion last year, which was over three times what was raised in 2016, according to Tech in Asia.

Related: ASEAN: Is There a Point to It?

From slow burner to pressure cooker

Nicholas Bloy, co-founder of private equity (PE) firm Navis Capital who has been based in Kuala Lumpur for the past two decades, can attest to that pervasive entrepreneurial spirit – at least for Malaysians.

“Every conceivable nook and cranny of entrepreneurship is explored by very shrewd Malaysian entrepreneurs,” Bloy reflects. “Some fail, some succeed, but Malaysians don’t lack entrepreneurial spirit.”

The same could be said for the rest of the region.

Paine, who works closely with early-stage startup founders across the region, sees no real difference between Southeast Asians and entrepreneurs from bigger ecosystems like in the United States.

While the innate drive was not lacking, increased government attention on entrepreneurship did help kick things into higher gear. So while previously it was a slow burn, much like a stew, these days it is more akin to a pressure cooker.

The increasing number of promising innovators springing forth from the fertile grounds in the region is attracting VCs and PE funds too, naturally.

According to professional services firm Ernst & Young (EY), a total of 101 deals worth US$5.9 billion were sealed by VCs and PE firms across Southeast Asia in 2017, 20% higher on year. And tech is definitely having a ball with 62% of the total money invested last year, a new record.

EY expects investor interest to stay strong in the foreseeable future. Across Asia Pacific, PE and VC firms are sitting on a mind-boggling US$270 billion in cash and very liquid assets – dry powder waiting for the investment cannons to aim and fire at magical prospects.

To Bloy, it’s a sign of the times. “There is no doubt that in the last ten years, the level of understanding of business owners, of governments, of banks, and of any number of constituents in that broadly defined asset class has grown a lot,” he observes.

Too reliant on government

That understanding means more money guns being repositioned to aim at the entrepreneurship scene. The momentum is encouraging. But there is an unwitting ghoul in disguise behind the sunny skies: the undoubtedly well-meaning governments.

Here’s the worry – governments in the region are driving too much of the burgeoning entrepreneurship ecosystem.

While public funds allocated for seed funding, for example, are helping many an entrepreneur kick-start their enterprises, it’s not a sustainable arrangement if Southeast Asia aspires to level up.

The attractions of piling into entrepreneurship are understandable from a governing perspective.

In the beginning, governments taking the lead is quite important to see, says Paine. “It’s very significant for newer ecosystems that the government pushes with commitment and good intentions. It is very important to kick-start the ecosystem and keep it sustainable,” he says.

Like some of its neighbours in the region, that was how Singapore started and became the de facto startup and innovation hub in Southeast Asia. It had sprinkled friendly tax policies and other incentives to turn aspiring entrepreneurs’ heads. Yet it also had other pickup lines that completed the recipe, says Bloy.

“The only reason Singapore is different is because it has those same public policy allocations, but it has also attracted a critical mass of private sector participants who bring their own money,” says Bloy. “With those private sector participants come international expertise,” says Bloy. “That is the extra ingredient, it’s not just about capital but also about expertise.”

Indonesia is an anomaly with its 266 million-strong population, essentially a single market that could sustain growth for a longer trajectory than its smaller neighbours.

Think of it like being in a mini-China, but with the real Facebook and Twitter on your phones.

go-jek - entrepreneur
Nadiem Makarim, chief executive officer of Go-Jek Indonesia has pushed the startup to become a household name in Indonesia. Photo: Getty Images

Indeed, GEM’s latest annual report singled the country out as having amongst the most conducive environment for startups anywhere in the world. In the 2017-2018 GEM report, Indonesia scored well for nine out of the 12 conditions. That places Indonesia second in the world in terms of conduciveness for entrepreneurship, behind the Netherlands which scored well in ten conditions.

Why greed matters

In theory, there is only so much the government could – and should – do before efforts become counter-productive.

In nurturing enterprises and startups, the equation at some stage needs the perspective of self-interested investors who want to see returns on their invested capital, and maximise those returns by creating as much value as possible.

“The problem is money is not enough. You need really good skills to allocate the money (properly) and to work with entrepreneurs and to help them succeed,” says Bloy.

And where it could go wrong is when the government funding programmes are led by people like salaried civil servants who don’t quite understand what makes startups go boom or bust. That’s very much unlike venture capitalists who had been there and done that themselves.

Many are investing their own funds and, understandably, would usually be more discerning investors as slip-ups make holes in their own pockets. “Civil servants have no idea how to effectively allocate capital and add value,” adds Bloy. “The private sector is more demanding and more discriminating about how it allocates capital than government – period.”

In reality, this means a world of difference to an entrepreneur pitching for seed funding from a government fund.

“I think there is an argument that (potentially lower standards) does undermine the private sector ecosystem. And it doesn’t lead to very successful outcomes, because people who don’t necessarily deserve capital get it,” says Bloy.

Contrast that with venture capitalists.

Often these private investors make decisions with their own money and have had the benefit of entrepreneurial experience alongside technical know-how. And that allows them to take chances on what may not necessarily be quantifiable.

jack-ma-investor - entrepreneur
Jack Ma, chairman of the Alibaba Group won over Masayoshi Son with his charisma. son’s US$20 million investment in Alibaba turned into US $19 billion when it went public. Photo: Getty Images

A prominent example of such a situation involves none other than Alibaba Group co-founder Jack Ma, who very early on in his entrepreneurial journey received an investment of US$20 million from Softbank founder Masayoshi Son.

In an interview with Bloomberg last year, Son revealed that he had, at the time, thought Ma’s then-business was not going to make it and that he knew Ma “had no business plan”. But he went ahead and backed the Chinese anyway because of Ma’s charisma. Son believed that Ma would eventually be successful – betting on the individual as opposed to the business.

And that bet paid off.

When Alibaba went public, Son’s US$20 million was worth US$19 billion, a return of 4,500%. It is difficult to imagine a government-backed funding programme doing that, because accountability could be a pickle.

In a nutshell, entrepreneurs here should think about how they can leverage on bigger ecosystems like that in the US or China, where startups operate on a vastly different scale.

The thing is, good ideas are rarely very specific to its home markets; good ideas usually can be applied universally, says Bloy. That means it’s more efficient to leave originality to the big boys in the US and China, where the larger ecosystem has gargantuan amounts of capital and produces massive numbers of talented entrepreneurs, he adds.

For smaller markets like Malaysia and its neighbours, a smarter way to go about it is to absorb good ideas from these bigger markets and localise them; like how Uber was forced to retreat from Southeast Asia by local rival Grab.

Where the private sector comes in is expertise. Because of the fragmented markets in Southeast Asia, entrepreneurs could use some help and perspective to think bigger.

The training wheels

The key is transitioning from a government-driven environment to a self-sustaining ecosystem. “Public and private sectors need to work together.

Public sector needs to listen well and move out of the way when need be,” says Paine. Naturally, Southeast Asian governments may turn to Singapore, a leading ecosystem in the region, and try to replicate its success. But that’s folly as no two startups are alike, Paine says.

Governments can make the environment more conducive with initiatives such as easier hiring processes, a supportive regulatory framework, and sponsorship for entrepreneurship events and conferences, for example. “Bring foreign investors and founders to visit the country and see why they should be based or invest in the country,” Paine adds.

What the government could do differently, though, is change the way public funds are channelled.

Instead of leading the funding of startups, it could be rejigged to match private funding instead, Bloy opines, to attract private money – a little like that match-funding grant Malaysia is rolling out. In simple words, governments should let the private investors decide where the party is and tag along.

This feature first appeared in the May 2018 issue of UNRESERVED.